Wednesday, September 30, 2009

Several firms are out defending Darden Restaurants (NYSE:DRI) this morning after the co beat consensus expectations in spite of worse than expected same-store sales (SSS). Stock is down over 2pts in pre market trading.

- Keybanc notes that while the 1Q proved that even DRI is not immune to the top-line pressures that plagued the casual dining industry over the June to August time frame, the firm remains optimistic that the recent quarter will represent a trough for SSS trends for both DRI and the casual dining industry. They are also encouraged by the fact that Darden managed to increase restaurant-level margins by 150 basis points year-over-year in 1Q10 despite the SSS pressures. Looking forward, the firm believes that SSS trends will sequentially stabilize and that the restaurant-level margin expansion will continue. Accordingly, they reiterate their BUY rating and $43 price target and would consider any near-term weakness in shares to represent a buying opportunity for DRI.

- JP Morgan notes that the net takeaway on Darden is that they do not think the story has changed and recommend that investors take advantage of stock declines resulting from overly optimistic trading sentiment into the release. Darden has spoiled investors with much better than industry average results. Moving forward, properly low-set sales expectations (JPM's blended comps estimate remains at down 3% vs. current guidance of down 3% to flat and previous guidance of down 2% to flat) are matched with an increased focus on costs. Darden remains a favorite in casual dining and an Analyst Focus List stock, with a $37 price target (Dec 09) representing a 14x multiple on F10 EPS estimate.

- CSFB seems to be the most cautious firm out this mroning saying EPS of $0.67 beat consensus by $0.01; however, particularly after KnappTrack improved in Aug., comp weakness at the core profit-drivers (OG and RL) was greater than feared, and guidance for the year was tweaked lower. They believe after-market weakness in the shares fairly reflects a more muted outlook at the core profit drivers, and would not be quick to buy on weakness today.

Catalysts: The call is at 8:30 AM tomorrow EDT. CSFB expects shares will open weak on the comp miss and reduced guidance. A plausible explanation behind comp deterioration into August and encouraging commentary on Sep. trends would be required to drive a more positive reaction in the shares.

Notablecalls: If you're in a mood to play bounces in this market I suggest you take a look at DRI.

Tuesday, September 29, 2009

The analyst expects a re-acceleration in CK licensing (roughly 45% of EBIT) will be supported by moderating FX headwinds and the continued growth of the global Calvin Klein brand, led by Warnaco (the largest licensee of CK at ~$2bn in retail). CK’s Fall launch schedule includes: CKJ “Body Jean” (and a strong emphasis on the “skinny” silhouette), “CK Fresh” fragrance, and relaunch of “Euphoria”.

Retail Outlet (40% of sales) trends also improvingRetail outlet comps should continue to accelerate into easing comparisons, with Sept comps up +3 to +4% vs. Aug up +2% (compared to 2Q09 comps down -3% and 3Q09 guid down -2 to -3%). Traffic trends are also improving to down (2)% to (4)% versus prior down (8)% to (10)%. Retail margins should be an opportunity, particularly in 4Q09 (given the lack of clearance inventory). Longer term, segment profitability could be supported by store reduction plans, with a potential to reach 7% to 9% margins (vs. 2009 forecast of 3-4% segment margin)

Moderate is In - Wholesale continues to gain shareWholesale is well positioned to gain share, as the increasing focus on value for nationally recognized branded product should benefit Van Heusen, Arrow, IZOD. These core brands, priced at value price points of $19.99 to $29.99, should continue to gain share from tertiary brands as well as private label. Merrill anticipates door expansion in these brands, as dep’t stores shift to the more moderate price point brands with an all door rollout of Van Heusen in 4Q09/1Q10. Timberland apparel, positioned as the opening price collection sportswear brand on the floor ($29.99-$39.99), should also gain share, with 600 doors this Fall (from 350).

Notablecalls: PVH is one of the premier retail names and with Merrill Lynch taking their rating to Buy with a pretty hefty price target, the call should garner attention.

Note that Buckingham Research blessed PVH with a Strong Buy last week and the stock is down couple of pts since then. So while Merrill is playing ketchup here I think the buyers will line up.

The market is trading slightly down this morning so I would suggest not chasing PVH in the pre market and would rather look to get long after the open. You get more size & a better price.

Monday, September 28, 2009

Citigroup's Semi Equipment team is upgrading Applied Materials (NASDAQ:AMAT) to Buy from Hold and adding it to Top Picks Live (Citi’s focus list) based on significant new SunFab wins, upcoming cost savings and a renewed focus on silicon share.

Firm notes they are slightly raising 2010 estimates from $0.42 to $0.46. Firm's target goes to $17 from $15 on the addition of a ~$0.20 impact from the restructuring to their former cross-cycle EPS estimate of ~$0.90. AMAT is replacing WFR on Top Picks Live.

Positive Catalysts Align — Based on checks at the Hamburg solar show, Citigroup now believes AMAT is about to sign a significant second wave of SunFab lines including four new lines (~300MW total) in India. While the ultimate success of SunFab remains debatable given how fast pricing is collapsing, the addition of new customers, more clarity on its cost cutting and up to ~$1B savings (mostly focused in sales/service/solar), some undiscovered margin leverage headed into 2010 and its new-found focus on regaining silicon share should be enough to drive the stock higher. Lastly, as the largest equipment provider to the global solar industry, it should benefit from big MW growth in 2010 and simultaneously avoid most of the pricing compression that will continue to plague cell/module makers.

Underperformance Opens The Entry Point — Sentiment remains very poor for AMAT which underperformed the SOXX by ~5% in the past 2wks and ~12% over the past month, meaning that as these catalysts play out, the Street will no longer be able to ignore the stock.

Notablecalls: Ketchup! Remember how FSLR ran on signing the China contracts couple of weeks ago? India is as good as China? Right? Right?

Oppenheimer is upgrading Viropharma (NASDAQ:VPHM) to Outperform from Sector Perform with a $13 target.

According to the analyst the upgrade ise based on on a potential surprise for Cinryze revenues and the generic Vancocin overhang being priced into shares. Importantly, 1) investor focus should shift to the continuing Cinryze launch following the development of guidelines for generic Vancocin; 2) Oppenheimer sees minimal downside should Berinert P be approved, as it would likely not impact Cinryze prophylaxis utilization; 3) they believe VPHM shares are pricing in generic Vancocin; and 4) firm is increasing their Cinryze estimates based on penetration in patients currently receiving prophylaxis steroids.

Cinryze launch in focus; revenues could surprise: Oppenheimer believes 2009 Cinryze sales will beat guidance, with revenues surprising as early as 3Q09. In their estimate, VPHM has set an achievable bar to beat guidance. They estimate Cinryze sales of $100M versus consensus of $84M during 2009.

ViroPharma introduced 2009 Cinryze guidance of $80-$95M on the company’s 2Q’09 earnings call, which he firm sees as unimpressive, since low end implies flat 2H’09 sales. They believe 2009 Cinryze sales will beat guidance, with revenues surprising as early as 3Q’09.

Although a generic Vancocin approval would be a near-term negative, they believe investor focus should shift to the continuing Cinryze launch, which could provide significant upside. Based on comments by the company, a greater number of patients being added to Cinryze Solutions are new patients versus those coming from clinical trials. Additionally, the firm notes that approximately 1,500 patients are currently receiving prophylaxis steroid treatment for Hereditary Angioedema (HAE), representing a key switch opportunity for Cinryze given the adverse events associated with steroids.

Not anticipating Berinert P approval; minimal downside if occurs: Although Oppenheimer does not anticipate CSL's Berinert P will be approved, they see minimal downside if FDA grants marketing authorization. Based on FDA's attitude toward Cinryze and Dyax's DX-88 in acute HAE, they do not believe FDA views the acute indication as clinically viable.

Vancocin generic overhang priced in: Firm believes VPHM shares currently reflect the launch of generic Vancocin in early 2010. Importantly, they anticipate FDA will issue final guidance and deny VPHM's Citizen Petition near term, leading to potential ANDA approvals in early 2010. However, they expect VPHM to retain ~$50M in annual branded Vancocin sales longer term

Increasing Cinryze estimates, upgrading to Outperform, $13 PT: Oppenheimer's 2009 Cinryze revenue estimate increases to $100M from $88M, and 2010 to $188M from $159M. Our 2009 total revenue estimate increases to $328M from $304M, and 2010 to $211M from $182M. Their 2009 adjusted EPS increases to $1.64 from $1.44, and 2010 to $0.38 from $0.30.

Notablecalls: Nice little upgrade. The only problem with this one is that it will be bid up too much in the pre-market action. You'd have to pay up 4-5% in hopes of selling the stock up 6-7% later on. If the market turns sour again the 6-7% scenario won't happen, making you (and all the other buyers) look silly.

So, ignore the pre-mkt action, see if it lets you in after the open dip.

Friday, September 25, 2009

With liquidity risks now behind it and dealer inventories coming in line, they view BC as a compelling three-year earnings recovery story. RBC's call requires only a 20% demand recovery over the next three years following peak-to-trough decline of nearly 60% since 2005. In the interim, they believe the rate of improvement in profitability and inventory metrics beginning in 2010 will provide reason for optimism, even if demand is slow to recover.

Industry conditions remain extremely tough, but a bottom could be approaching. The firm recently surveyed nearly 150 dealers. While tight credit continues to take its toll, industry demand appears to be stabilizing at a 135K run rate. Meanwhile, inventory levels are also clearly in much better shape, especially for Brunswick dealers.

Brunswick is on the cusp of a demand-agnostic earnings inflection. As the inventory de-stocking cycle runs its course, Brunswick's production should be significantly higher in 2010-2011, even if demand does not improve. With flat demand, they estimate that Brunswick's boat segment revenue will grow 65% and 35%, respectively, over the next two years

What Will Earnings Look Like As This Unfolds?Given what they know about Brunswick's cost structure, the firm would expect high incremental margins as production comes back. The initial stages of recovery should be especially powerful, as higher sales levels should coincide with cost-reduction efforts coming to fruition.

Brunswick migrates toward 1:1 inventory replenishment, RBC believes the business can generate ~$200M of EBITDA in 2011 without any improvement in demand. Assuming demand ultimately recovers to 150K-200K units (vs. the prior cycle peak of over 300K), they estimate that BC would generate EBITDA of $240M-$620M.

BC shares have significant upside potential. RBC's $17 price target assumes industry demand recovers to the 150-175K range by 2012. They then apply an EV/EBITDA valuation range of 6-8x, discounted back two years at 15%.

The "Wholesale Bounce" Should Provide A Bridge To An Eventual Demand Recovery

RBC notes that typically, they are not big believers in investing around normalized earnings scenarios that can take years to play out. Such theses often prove fickle because few investors are truly committed to an investment horizon beyond 6-12 months. RBC's view in this particular case is different. Given the leverage in Brunswick's model, the rate of improvement in Brunswick's operating metrics should be palpable. A year from now, they suspect investors will see dramatic margin improvement (albeit from a very depressed base) coinciding with extremely favorable inventory metrics.

Notablecalls: This call should create some exitement among investor and inject fear into the short base.

Short interest stands at 12%+ and with the stock likely headed towards a new high shorts are less likely to fight the trend and cover.

The $17 price target seems to be the new Street high.

I see this one trading above $10 level today, with possibly $10.50 (if the market does not roll over)

Thursday, September 24, 2009

Citigroup is out with a major call on National Semi (NYSE:NSM) upgrading it to a Buy from Hold with a $23 price target (prev. $18).

National is a strong power management vendor whose management executed well last cycle by divesting non-analog product lines and strengthening its analog product offering. Profitability gains from F04-F08 were impressive, with gross margin ascending to 64% from 50% and operating margin increasing to 25%- 30% from 10%-15%. NSM’s significantly higher gross margin structure last cycle created investor concern regarding future revenue growth prospects. This concern, coupled with immature new product growth initiatives, has created overly negative stock sentiment. Within this context, Citigroup chooses to upgrade NSM for the following four reasons:

NSM’s 7 out of 23 (30%) Buy ratings now represents the lowest Buy mix in our analog group while its 4 out of 23 (17%) Sell mix is the second highest within the group. Furthermore, sponsorship in the name appears weak, with no upgrades post 9/10/09 earnings despite NSM delivering strong results.

2) stock offers sector-leading gross margin expansion in C10E;

NSM’s fab closures at its China (completed F1Q10) and Texas (targeting F1Q11E) facilities will drive gross margin benefits of ~100bps ($15M annually) and ~400bps ($60m annually), respectively. These fab consolidations along with other cost saving actions will enable NSM to achieve +570bps gross margin expansion in C10E. This positions NSM behind only IRF (+836bps in C10E) and significantly above the analog group average of +326bps GM expansion in C10E.

3) industrial end market, at 40% sales, is underappreciated, in firm's view, and a C1H10 driver based on seasonality and lagging cyclical improvement; and

With ~40% of sales from Industrial, NSM has the 3rd highest exposure in analog group, behind only ADI(~50%) and LLTC (~50%). Recent analog company commentary has indicated a pickup helped by US and European improvement as well as ongoing Asian industrial demand. Notably, the four companies in group with the largest industrials exposure (ADI, LLTC, MCHP, NSM), as a group, have lagged the sector in stock performance over the last three quarters to date by 2.6% (1Q09), 14.2% (2Q09), and 5.2% (3Q09QTD). Citigroup expects this trend should reverse near-term with the expected uptick in industrial activity through C1H10E.

4) fears of share loss to TXN in handsets look overblown, with smartphones a substantive catalyst through next year.

NSM has lagged analog sector performance over the past 6 months in part due to prevalent negative sentiment concerning share loss in wireless to TXN at its largest handset customer, Nokia (11% of sales in FY08). Share loss sentiment appears overblown as growth appears to have stabilized in mid-2009 after experiencing a fall-off in 4Q08. To be clear, Citigroup does see NSM having lost some share to TXN but this has been mostly within lower-end handsets. More importantly,they still see NSM well positioned within the highendmulti mode/feature rich phones.

For F2Q10, they edge up EPS by $0.01 to $0.14 on a 0.7% higher sales assumption of $340M versus $338M. Firm's 2Q revenue estimate implies 8.1% qq growth, is 1.7% above the Street, and marks the top of NSM’s $325M- $340M guidance range.

Notablecalls: This is one gutsy call from Citigroup and will likely get the attention of traders starting from early on.

I see this one trading up 3-5% over the day.

The only problem here is the general market. If the market continues to roll over (as witnessed post FED announcement yesterday) the buyers of the NSM upgrade are going to look silly. That makes NSM a kind of a market bet. I personally dislike these.

Dennis Gartman notes this morning:

'... Today, then, shall be a very important day for the stock market here in the US and then abroad, for if the “reversals” are to be denied, the markets shall have to stabilize and push higher. If we were to open firmer and then fail, the technical damage wrought would be quite serious indeed. As we write, the futures are all trading rather markedly lower, and that means perhaps a “gap” to the downside right from the outset. Let’s please have our protective hats on and have chin straps tightened; this might get ugly!...'

Wednesday, September 23, 2009

Jefferies is out with an interesting call on Palm (NASDAQ:PALM) saying we could see a bidding war for Palm, could garner c.80% premium. Nokia (NYSE:NOK) mentioned as the main bidder.

Strategic rationale: WebOS as carrot - Palm gives buyer a PC-class OS (WebOS; Linux-based, multi-tasking) and a US-centric high-end handset (Palm Pre) that best mimics iPhone experience (UI) - courtesy of senior Apple staff defections to Palm. Nokia can't compete in US (c.6% m/share) or high-end with Symbian but with another OS (would make 4, or 5 incl MSFT in Noia Netbook) 3rd Party application development is confused to say the least. Palm would have to be run as a separate business near term; 'parallel' roadmaps may take 1yr+ to converge; it could be 2011 before we see a fully integrated WebOS and Ovi services platform in a new formfactor device (tablet?). Meantime, Symbian remains Nokia's workhorse for roadmap designs before being restricted to mid-tier as WebOS supplants in high end.

PC OEMs may create a bidding war - Palm is an opportunity for OEM "escape" from the graying PC market (Dell, Toshiba, Asus, Acer). This could see a bidding war for Palm – Jefferies sees a hefty premium to Palm's current m/cap ($2.4bn; EV $2.2bn). It's much cheaper than Apple (FY'10 1.2-1.3x EV/sales vs. c.3x) but counterbids could see valuations soar; a 3x EV/sales bid would mean $4.3bn or a c.80% premium to current price. Ignoring synergies and assuming 2m handsets/qtr at $250 each and 15% op% they think it may take over 14 years to breakeven on this deal. But the strategic merits would outweigh - this could arguably leave Nokia only 1yr rather than 2-3yrs behind Apple's software development and high end UI, helping retain Nokia's global market share lead (2Q09e c.38%) just as Apple enters China. Palm is already looking to raise cash (pro forma net cash c.$200m after raising $325m) which means a capital injection may not be needed from any acquirer. Add in R&D savings (Nokia spent €3.1bn on device R&D in '08, much of this on solutions and services) and payback shortens. Nokia has €3.2bn net cash.

Taking tablets - With Apple rumoured to launch a 10" screen tablet, MSFT steals its thunder with a prototype two-screen tablet. The mobile computing form factors are fast developing in Nokia's absence. Nokia's proposed tie-up with Intel does not square nicely with a Palm acquisition. An Intel pairing would, in Jefferie's view, likely see new devices on a Linux OS (Nokia's Maemo with Moblin flavours) on top of say Intel's "Medfield" processor sometime in 2011 with volume ramp in 2012 (Apple tablet 4Q09?). However, Nokia could force Maemo onto its own new form factor next year. Yet, little past evidence exists of genuine design innovation at Nokia.

Notablecalls: Selling out would be the only sensible thing to do in Palm's case. They are up against players that are way better capitalized and able to bring new products to market at speeds way greater than Palm. How long did it take for the Pre to reach the shelves?

Nokia is desperate and has the cash. Why not give it a go?

PS: PALM offering priced this morning.

PPS: Not making a call here. The offering was priced at $16.25/share. Absent an offering I would have been all over this one.

Tuesday, September 22, 2009

Citigroup is out with an upgrade on Macy's (NYSE:M) to a Buy from Hold. New price target stands at $30 (prev. $15)

Citigroup's Take — Following recent proprietary mtgs. with mgmt., they are upgrading M from a Hold to a Buy rating based on: 1) M’s ability to drive the topline as the My Macy’s localization initiative cont. to gain traction; 2) operating margin tailwinds from product cost deflation and Macy’s speed to market initiative, and 3) upside fr. current levels based on $30 price target.

Rationale #1: My Macy’s to Fuel Topline — Citi is encouraged by the consistent, positive early results that Macy’s has reported from its 20 pilot markets since 4Q08, and believe that this localization initiative should lead to improved topline (and margin) trends ahead, particularly beginning in 2010.

Rationale #2: Margin Tailwinds Abound — Macy’s expects benefits from product cost deflation to be greater in ‘10 than in ‘09. Based on Citigoup's proprietary analysis, cost deflation could boost gross margins by 50 bps next year! Also, Macy’s speed to market initiative is underway, and while Macy’s is a small step behind the competition, they view this as an investment positive, as a majority of the benefits are ahead of us.

Rationale #3: Upward EPS Revisions Warranted — Firm's previous EPS estimates and consensus are too low in light of the topline and operating margin drivers discussed above. They also view mgmt’s ‘09 guidance as conservative. As such, they raised their 2009-2011 EPS estimates and target price for M. Lastly, they raised Sept. SSS estimate to (-4) to (-6)%, up from (-5) to (-7)% previously.

As such, Citigroup is raising ther 2009-2011 EPS estimates for Macy’s to reflect:

- More constructive outlook regarding topline and margin benefits from the successful execution of the My Macy’s initiative (benefits begin in 4Q09, biggest impact in 2010);

- Margin tailwinds from product cost deflation (M anticipates more of a benefit in 2010 than this year); and

- Improved sales, margins, and inventory turns from the company’s speed to market initiative and product lifecycle management technology rollout (benefits begin in 2009 and should continue in out years).

They are raising 2009 EPS estimate to $1.30 per diluted share, up from $0.97 previously. The upwardly revised estimate is significantly above Macy’s guidance of $0.70 to $0.80, and above current consensus of $0.91 per diluted share. Raising 2010 EPS estimate to $1.80 per diluted share, up from $1.19 previously and above current consensus of $1.20.

September SSS Estimate Revision (details)Citigroup is raising September SSS estimate for Macy’s to the range of (-4) to (-6)%, up from (-5) to (-7)% previously, and vs. (-6.6)% last year. Recall, management does not provide monthly SSS guidance, but expects SSS in the back half of 2009 to decline (-5) to (-6)%. Citi believes that Macy’s promotional calendar is a slight positive YOY, as the company’s Labor Day Sale shifted from August Week 4 to September Week 1 last year into September Weeks 1-2 this year. They also note that Macy’s has slightly higher geographic exposure to the Northeast region (~22% of the store base vs. JCP at 14% and Kohl’s at 18%), so that later school start dates this year in many districts was likely more pronounced and favorable for the company this month (shifted sales from August into September).

Notablecalls: Macy's suddenly has a lot going for it:

- Note that Buckingham Research was out upgrading Macy's to a Strong Buy yesterday.

- Citi's price target looks like the new Street high; Previous high seems to have been $24.

- There's a nice qualitative part to the call. That's something rarely seen when it comes to Citigroup research.

- The chart looks OK; Short interest stands at around 9% of float. Should add some fuel to the fire.

All in all, I think M can do at least 5% upside here. I would not rule out a 6-7% over the day if the market continues to hold.

Monday, September 21, 2009

UBS is out with a rather major upgrade on Monster Worldwide (NYSE:MWW) to Buy from Neutral with a $27 price target (prev. $17).

According to the analyst, recent hiring trends and currency suggest modest upside to near-term estimates, while new search technology could boost 2010. They are raising their Q3 EPS estimate to $0.02, from $(0.03), 2009E to $0.10 from $(0.02), and 2010E to $0.30 from $0.02.

Optimistic About Hiring DemandUS and Europe Monster Employment Indices have shown recent improvement and together are showing sequential seasonally adjusted growth. While unemployment is still high, it is stabilizing, initial unemployment claims are now declining, and the ISM employment surveys have risen to the highest levels since last fall.

Both the US and Europe Monster Employment Indices have recently begun showing seasonally adjusted m/m improvement and moderating y/y declines. The US MEI rose 2.5% m/m in August, well above 0.2% in July, and -0.8% per month in Q2. The 3-month average rose 0.6% m/m in August, an improvement from -0.8% in July and -1.6% in Q2.

The Europe MEI rose 0.3% m/m in August, above -0.3% in July, and well above -3.1% per month in Q2. The 3-month average fell 0.8% in August when weighted for GDP and seasonally adjusted, improving from -3.1% in July, and - 2.6% per month in Q2. Sequential trailing 3-month average growth improved in six out of seven countries in the index.

Trovix Should Boost CompetitivenessUBS thinks Trovix, a new patented search technology, could be a game-changer in how employers view Monster versus its competition. We think this could enable Monster to grow market share while maintaining or increasing pricing. Trovix brings targeted search technology enabling the ranking of job applications, resumes, and job descriptions by the relevance of the search results. This should make for a more efficient and user friendly experience for employers and seekers.

In Q3-08 Monster acquired Trovix, a for $73mm. Trovix is a semantic search technology company focused on developing technology products to analyze resumes and job descriptions by considering key attributes such as skills, work history, and education. The implementation of the technology should enable Monster to provide employers (who pay to post jobs) and job seekers with innovative search capabilities that simplify the recruiting process by providing only relevant and targeted search results. UBS expects Trovix to create a much simpler and more efficient search and match experience for both job seekers and employers. The new resume search enables the employer to search for job seekers with relevant qualifications and then analyzes and ranks the information quickly and efficiently.

Notablecalls: I like this call:

- MWW is kinda of out-of-picture (or forgotten) stock

- UBS' estimates are now way above consensus

- Trovix sounds interesting

- Short interest stands at a cool 12%. You now have a stock about to reach a new high on a tier-1 upgrade. This should make people on the short side quite nervous.

The only problem here is the market as pre market action is way in the red. Yet, I think MWW can overcome this and run nonetheless.

Friday, September 18, 2009

Morgan Stanley is out with a major (not to mention gutsy) call on InterOil Corporation (NYSE:IOC) initiating coverage on the name with an Overweight rating and $65 target.

According to the firm, IOC’s business model has matured as interest in the story has waned. They see compelling risk/reward and believe IOC is poised for a major transformation — from a volatile, and often controversial, exploration-focused integrated oil company to a global LNG player with significant exploration upside in Papua New Guinea (PNG). Firm sees $5/share of value for existing downstream operations, with a call option on successful LNG development worth $60/share ($30 upside from current share price). Their price target offers 88% upside, and they see upside potential to their target as elements of the story derisk over time.

2) Potential for resource monetization. IOC is in the final phases of due diligence with several companies on an upstream partnership and LNG venture;

3) Exploration upside. Morgan has a favorable view of current drilling potential of the Antelope-2 well and exploration potential in PNG.

4) Refining upside. They see refining upside for IOC as a niche refiner levered to economic growth in PNG.

Unnoticed positive exploration and development story creates a buying opportunity.They expect the gap between improving fundamentals and the stock price to close as the new story is understood. Firm has investigated alleged negative claims, visited every IOC well-site in PNG, conducted due diligence, and analyzed the financials. They expect significant share price appreciation once the market begins to see evidence of transformation led by potential 2009 catalysts: success at Antelope-2 and a sell-down of IOC’s project interest.

Better Positioned TodayIOC appears to be better positioned for success than at any time in its 15-year history. As an early-stage exploration company with only 3 quarters of positive net income (and zero fiscal years), IOC has raised numerous financings from various parties since its inception in 1997 to fund operations and exploration.

- IOC’s resource estimate has risen from 0 in 2007 to 3.4Tcfe in 2008 to 6.7Tcfe post Antelope-1 in March of 2009.

- Its well results have been incrementally better from 2006 to most recent well in 2009.

- It is currently drilling another well into the Antelope structure that should be lower risk than its prior wells; it has the most visible catalysts in its history.

- It has a high probability of executing an LNG partnership to monetize its gas, they think.

Yet its stock is 35–40% off its 2005, 2007, and 2008 highs. Morgan believes many investors may be associating earlier versions of IOC’s story with the stock while IOC’s position has materially improved. Their primary interest is the future and not IOC’s past.

Notablecalls: IOC is probably the most controversial Oil name out there. I'm sure everyone is familiar with the 'work' Fraud Discovery Institute has done in the name claiming IOC is a Ponzi scheme. This is partly the reason why none of the tier-1 firms have picked up coverage on the name.

And now MSCO comes out saying they have done lots of due diligence and they believe IOC is worth $65 here and possibly $100 if things work out well.

That's a blessing. They cannot afford to be wrong here.

IOC is surely a mover and will probably show its good side today. I would not be surprised to see a HUGE run in this one today and coming weeks.

Merrill Lynch/BAM is upgrading Sandisk (NASDAQ:SNDK) to Buy from Undererform with a $30 target (prev. $9.90).

According to the firm the new price target is derived from the average of our mid- and up-cycle fair values (vs. the average of trough- and mid cycle fair values previously). They target about 2x P/BV (PO implies 1.7-1.8x based on 2010-11E) vs. 2-4x during mid- and up-cycle periods (2002-07) or 1-2x in the recent downturn (2008-2009). Firm is no longer bearish on SanDisk. They now expect a solid earnings recovery in 2H09 and 2010-11. Merrill's new forecasts for OP and EPS indicate an almost up cycle level of earnings through 2010-11 – surpassing the previous upturn average (2006-07) but slightly lower than the 2005 peak. They revise their EPS estimates by more than 100% due to dramatic changes to ASP assumptions for SanDisk’s flash card products (about 30-40% higher for 2010-11 on a better supply and demand outlook for NAND chips).

Tight NAND supply presents new catalystSanDisk differs from typical OEMs such as Apple due to its captive chip production (JV fabs with Toshiba) and the option to purchase chips from Samsung. Consequently, the best case scenario for SanDisk should be a NAND shortage. Merrill's research shows tight supply of NAND due to chipmakers’ record low capex spending in 2009-10. Against this backdrop, they raise their ASP assumptions for SanDisk’s products by 30-40% for 2010-11, leading to EPS revisions of over 100% on a higher OPM (15-17% in 2010-11 vs about breakeven previously).

Financials and technologies look good.Financial distress no longer concerns Merrill. SanDisk’s B/S remains healthy (over US$1bn net cash including long-term financial investments), despite large losses in 2H08-1H09. They also note the successful deployment of new technologies such as 3-bit cell (vs. MLC) and 32nm (vs. 43nm) – about one or two quarters ahead of Samsung. Firm thinks Korean chipmakers will focus more on DRAM capacity expansion vs. NAND due to relatively better margins and market share gains at the expense of Taiwan DRAM vendors. This also suggests upside to NAND.

Potential profit taking shouldn’t be a concernSanDisk’s share price has doubled YTD along with NAND price strength. This may lead to profit taking among investors who bought the stock early this year. However, the current share price reveals low P/BV multiples (1.5x based on 2009E book) vs. its historical average (2.2x during 2002-07). The stock traded at 1x P/BV during the deep downturn in 2H08/1Q09, but Merrill's new forecast suggests better than mid level of earnings momentum or even higher than the previous upturn period (2006-07). Therefore, they think any profit taking driven stock price correction would offer a good entry point for new investors.

Thursday, September 17, 2009

Keybanc is out with a fairly interesting call on BorgWarner (NYSE:BWA) cutting their rating to Hold from Buy

Firm is lowering their earnings estimates to $0.07 from $0.27 for 2009 and to $1.35 from $1.58 for 2010 as they are incrementally concerned that: 1) BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock (Keybanc is lowering their 3Q09 estimate to $0.10 from $0.18; First Call mean is $0.13); 2) negative factors affecting 2Q09 and 3Q09 earnings could persist for several more quarters; and 3) potential weakness in stock price could present long-term investors with a more attractive entry point given the solid longer-term fundamentals at BWA.

- Keybanc now believes that increased production in A and B segment vehicles driven by European scrappage programs is masking the traditional seasonal declines in higher-end vehicles where BWA has majority of its content. So while European production is currently forecast to decline sequentially 2Q09 to 3Q09 by 4%, they expect BWA sales to decline by 8%. They do not believe the lowered expectations can be offset by North America, as improved production expectations are primarily driven by "Cash for Clunkers". Part of the sales declines may be offset by the increasing Euro, although limited profitability in Europe negates its impact to operating income.

- They believe investors may be particularly sensitive to lowered expectations given disappointing 2Q09 results and the overall positive sentiment for the rest of the group. Following better than expected reports from Johnson Controls (JCI-NYSE), Autoliv (ALV-NYSE) and Gentex (GNTX-NASDAQ), BWA reported 2Q09 recurring results of a loss of $0.05, which was significantly below both firm's estimate of $0.09 and the First Call mean estimate of $0.07. Sales declined 40% year-over-year to $916 million, well below Keybanc's estimate of $973 million and the First Call mean estimate of $970 million

While near-term Keybanc is incrementally concerned over worse than expected results, they continue to believe that longer-term BWA results will outperform expectations. As such, they believe that potential weakness in the stock price could present longer-term investors with a more attractive entry point than current levels.

Notablecalls: First of all, note that Autoliv (ALV) raised guidance this morning. So far, the stock is doing nothing. This is a tell.

I think BWA will work today to the downside as:

- Keybanc has a pretty good track record when it comes to auto parts.

- They are calling for a miss. Around these levels, this is unacceptable. People will be looking to book profits.

According to the analyst the upgrade comes as as the $600 million equity capital raise further improves holding company liquidity. This should continue a virtuous cycle whereby the company’s cost of debt declines, the ability to refinance debt and extend credit facilities increases, financial strength ratings stabilize, and operating performance improves. Firm increased their target price to $18 from $7 as their primary concerns have diminished. Deutsche's EPS estimates were revised to factor in the capital raise and 3Q’09 mortgage insurance arbitration settlement.

No near-term pressure on the holding companyFollowing the equity offering, the firm estimates Genworth’s holding company has $1.5 billion of cash and short-term investments, which should be sufficient to meet debt service needs through the end of 2011. The next debt maturity is not until June 2011, which is a 57 billion yen security ($630 million). Genworth could also monetize its $1.5 billion remaining stake in its Canadian mortgage insurance business, if needed.

Capital shortfalls in the European mortgage insurance subsidiary would need to be funded by the holding company. That business has approximately $250 million of capital and $250 million of unearned premium supporting $6 billion of risk in force. Should any capital shortfall occur, Deutsche would expect the ultimate size to be manageable.

Further upside if life earnings power can be increasedTo the extent the price increases, cost savings, and redeployment of excess liquidity in the life insurance business can lead to a higher ROE than firm's normalized estimate of 7% for Genworth’s life segment, the stock’s valuation multiple would have further to expand. The company is also increasing prices in its mortgage insurance and lifestyle protection businesses.

Deutsche expects the US mortgage insurance business to suffer from losses through the end of 2010; however, to the extent housing prices and unemployment stabilize in 2010, this business could return to profitability in 2011. Based on their expected losses through the end of 2010, the firm estimates the US mortgage insurance capital position would decline to approximately $900 million from $1.9 billion in 2Q’09. The risk in-force to capital ratio would increase to 31x, which would be above the maximum regulatory capita l ratio of 25x. The insurance regulators, however, have shown some flexibility as they are willing to let the mortgage insurers operate above the 25x ratio. Genworth’s mortgage insurance regulator in North Carolina passed such a law in July.

Notablecalls: While Barclays beat Deutsche to the punch 2 days ago (right following the offering) the call is likely to push GNW stock further higher.

I think $14 (or possibly somewhat higher) may be in the cards today as most of the other tier-1 houses still haven't upgraded their ratings or even adjusted price targets higher (most are in single digits). So playing Ketchup may be the theme here for quite some time.

Wednesday, September 16, 2009

Credit Suisse is upgrading Digital River (NASDAQ:DRIV) to Outperform from Neutral with a $44 price target (prev. $37.50).

Firm notes that with reaccelerating year-over-year revenue growth forecasted for the second half of 2009 and 2010 and EPS reacceleration beginning in the December 2009 quarter, combined with potential upside to near-term consensus estimates for the September quarter, they view the risk/reward of Digital River’s stock as attractive. Because of these near-term drivers, as well as their positive thesis regarding the company’s long-term growth opportunity as an On Demand e-commerce platform provider, they are upgrading Digital River from Neutral to Outperform.

Catalysts: For the September quarter, Digital River has guided to a 1.0% sequential increase in revenue at the midpoint, which is below average seasonal growth of 7.3% and management’s historical guidance of 3.2% sequential growth. Management suggested that the September quarter guidance was based on conservative assumptions for both the typical uplift from the back-to-school season and the annual product launch period of several of its customers experienced in September. Based on the on-time launch of Norton 2010, as well as both CSFB's checks and their analysis of retail sales data (suggesting that some back-to-school uplift has occurred), the firm believes that Digital River is well positioned to show upside to conservative guidance and consensus estimates for the September quarter.

Revenue & EPS Growth Drives Digital River’s Stock PerformanceWhile potential upside to near-term estimates represents a significant driver for CSFB's raised rating, Digital River’s stock price performance often closely tracks the acceleration and deceleration of revenue and earnings growth. When they downgraded Digital River in September 2008, they were concerned that consumer software spending in the United States had slowed after a traditional boost to sales at the end of August and early September from back-to-school. Presently, however, CSFB's model forecasts a year-over-year reacceleration in revenue and EPS growth. Given that Digital River’s stock price has historically performed better in periods of high or accelerating growth—particularly EPS growth— they believe that Digital River’s current stock price represents an attractive entry point.

With two quarters of reaccelerating year-over-year revenue growth in the second half of 2009 and EPS reacceleration beginning in the December 2009 quarter, combined with potential upside to consensus estimates and current relative valuation multiples below historical ranges, CSFB views the risk/reward of the stock at current levels as attractive. Furthermore, their confidence in their above consensus estimates that imply a reacceleration in revenue and EPS growth has been boosted by the on-time launch of Norton 2010, as well as both checks and analysis of retail sales data (suggesting that a somewhat normal back-to-school uplift occurred in August). As such, they believe that Digital River is well positioned to show upside to conservative guidance and consensus estimates.

1) Leader in a growth sector – Merrill believes eCommerce sales will rebound to double-digit y/y growth in 2010, resuming the secular shift Online that was interrupted by the recession. Amazon has built sustainable competitive advantages in eCommerce including customer loyalty, distribution infrastructure, as well as technology investments, and these advantages have shown through with a sales gap to ecommerce growth between 1,700 and 2,800bps over the past six quarters. The gap shrank a bit in 2Q due to Amazon’s added exposure to video game category, but the firm thinks the gap could re-expand if the category improves (we have the gap shrinking in our estimates). This seems too conservative. Improvement in y/y industry growth to 11% in 4Q is driven by easy y/y comps. as well as assumption that the industry could see a normal 4% sequential growth in 4Q, consistent with 2006 and 2007.

5) Valuation upside based on history, with valuation support expected at 18x FCF. Amazon’s stock has traded at between 0.8x–2.0x sales over the past 5 years, and when company was beating estimates in 2007 stock moved toward higher end. Merrill believes a similar scenario could play out over next 12-months.

6) Competitive risks overblown, at least for next 12-months - Amazon’s stock has underperformed the Internet peer group since April due, in part, to competitive fears. This concerns have been driven by weaker media sales in 2Q (video game exposure) and a corresponding closing of US sales growth gap vs. eBay, loss of Target as a 3rd party partner in 2011, launch of Wal-Mart’s 3rd party online marketplace, and eReader announcements from Barnes and Nobel and Sony. Merrill believes that none of these competitive developments will impact Amazon’s sales in 2009 or 2010 (Wal-Mart’s sales are a small fraction of Amazon’s, and eBook sales barely impact Amazon’s total sales this year), with the outside possibility that Amazon lowers Kindle HW price to increase sales at the expense of margins. While there could be competitive margin pressure in sector long-term,Amazon’s customer, distribution and technology advantage position the company well long-term.

Notablecalls: So this upgrade follows similar upgrades in EBAY and YHOO over the past couple of days. The s-t risk here is AMZN gets bid up too far in the pre market (with large vol) and ends up like EBAY yesterday. EBAY got whacked soon after the open as people scrambled to take profits on a large gap-up.

So, I hope people will be somewhat more cautious today.

AMZN is surely the strongest mo-mo play in the group, so I suspect you will have to pay at least $85 to be involved.

I suspect it can do $86+ as soon as today. The stock's an animal! A-n-i-m-a-l! It has lagged the group and now the gates are open...

Barclays is raising their target on Genworth Financial (NYSE:GNW) to $17 from $10 following the company's announcement that it will begin on Tuesday a $500 million equity-raising effort. Even though the stock is being sold at a sharp discount from book value -- and that sale of shares, therefore, will reduce Genworth's book value per share by about 7% to roughly $25 -- firm views the equity-raising effort as part of a larger successful initiative that's been under way for some time at Genworth to right itself.

Indeed, earlier this year, when it looked somewhat questionable that Genworth would be able to redeem maturing debt, Barclays began applying a 50% discount to peers' price-to-book multiples in order to arrive at an appropriate price-to-book ratio for Genworth. Genworth seemed to be having problems on multiple fronts -- in domestic mortgage insurance, to be sure, but also in life insurance, long-term-care coverage, lifestyle protection, and on the investment side of its balance sheet. Since then, however, developments have turned decidedly more positive for the Richmond-based insurer.

Clear signs of housing-market improvement in Canada and Australia have emerged.Prices have been increased in the company's Lifestyle Protection business that have helped to offset the drop in earnings associated with rising unemployment in Europe, especially in Spain and Ireland. Risk in the investment portfolio has been cut. Cash has been raised at the holding company through the sale of a minority interest in the Canadian mortgage-insurance operation.

Even in domestic MI, which has been the deepest source of Genworth's difficulties, things seem to be, if not getting better, then stabilizing. In particular, while prime-mortgage delinquencies and delinquencies from geographies outside the so-called SAND states -- Florida, California, Arizona, and Nevada -- are rising, delinquencies from the SAND states and on alternative products such as alt-A mortgage are falling, leaving the overall rate of growth in delinquencies flat. The average reserve per delinquency, meanwhile, has stabilized at about $23,000, a reflection of the shift of the delinquencies away from the SAND states, where claims have tended to be higher than elsewhere in the country.

Barclays' bottom line is that while Genworth is not yet on an entirely solid footing -- the June quarter showed continued cash outflows from many of its assets-under-management product lines, and the improvement in domestic mortgage insurance, while real, has nonetheless been modest -- they do view the company as better able to ride out the recession than they thought just a few months ago. Certainly the myriad actions the company has taken, which also have included sharp cuts in costs, have left the company in a far better liquidity position than it was in earlier this year, in our view. Holding-company cash now stands at $800 million, excluding the proceeds from the equity issuance that was announced last night. And that is afterhaving paid down debt. The company continues to experience difficulties but has exited its most challenging period. Firm's new higher price target of $17 reflects this improved reality. We reiterate our 1-Overweight rating.

Notablecalls: That $500 million equity offering has been in the cards for months. I got a heads up on it from a tier-1 firm sales guy about a month ago and was actually surprised it took so long to be announced.

So, anyway...here it is. It will put the co on a much more solid footing and that should be reflected in valuation.

Thomas Graff over at RM commented on Genworth bonds noting 5.75 due in 2014 traded many times in the last few days in the $79-81 area. Hearing post-common offering the bonds are bid at $87.

- Piper Jaffray is raising EBAY to Overweight from Underweight while raising their target to $30 (prev. $19).

According to Piper the upgrade is based on their quarterly eCommerce survey which suggests recent changes made to the eBay marketplace could have a longer term impact on stabilizing the business. Also, web traffic data suggests slight upside to the September quarter.

Firm's proprietary quarterly eCommerce survey of 300 online shoppers shows 79% were 'satisfied' or 'very satisfied' with eBay, up from 70% the previous two surveys.

Web Traffic Improving. Data from compete.com shows unique users to eBay's U.S. site increased 12% y/y in August, up from ~5% y/y the prior 3 months. Piper is modeling for marketplace revenue to be down 8% y/y in Sept. Given GMV is the critical part of the equation, unique users are only a directional indicator toeBay's marketplace revenue.

Despite recent upgrades, Street is still largely neutral on shares.

Piper Jaffray Quarterly eCommerce Survey Shows Improved Satisfaction. Their proprietary quarterly eCommerce survey of 300 online shoppers shows 79% were 'satisfied' or 'very satisfied' with eBay, up from 70% in our June 2009 and March 2009 surveys, and 73% in our September 2008 survey. Firm believes customer satisfaction is a leading indicator of future sales because it leads to repeat sales, lower marketing spend, and better margins.

Web Traffic Improving, Suggest 1% Revenue Upside To September. Unique users to eBay's U.S. site are showing consistent signs of improvement suggesting upside to marketplace in the September quarter. Unique users in August increased 12% y/y in August, up from 8% y/y in May, 4% y/y in June and 3% y/y in July, according to compete.com.

Price Target. New price target of $30 (from $19) is based on a sum-of-the-parts valuation using 10x EBITDA for the marketplace business, 12x EBITDA for the Payments business, and a $2.75 billion valuation for Skype, in line with what eBay has an agreement to sell Skype for. We increase our target multiples from 6x previously, which the firm believes is fair for a high cash-flow generating business that is stable rather than in decline.

- UBS is upgrading EBAY to Buy from Neutral with a $28 price target (prev. $24).

Recent data from top eBay vendor ChannelAdvisor and other channel checks suggest eBay same store sales may be starting to turn a corner, coming in at +4.6% Y/Y in Aug vs -10% in Q1 and -5% in Q2. Upcoming changes including DSR updates, search enhancements, better dispute resolution tools, and improvements/expansion of Multi-Variable Listings should continue to drive transaction growth and accelerate Marketplace GMV. In addition, a renewed focus on the secondary market poses a positive long-term opportunity for the company.

Skype Sale Removes OverhangWhile the P2P licensing dispute with Joltid is still a variable (eBay retained a 35% stake), UBS surmises that the buyers are familiar with both the technology in question and the Skype/Joost/Joltid founders given prior relationships, mitigating risk. Total consideration values Skype at $2.8B (14x ‘10E EBITDA) and the transaction allows eBay to continue investing in (and focusing on) its core ecommerce businesses.

Potential tough comps from cashback in Q4eBay has benefited from Microsoft's Cashback Program to promote its search / Bing (one of the initial participants last year), so eBay could face tougher comps in Q4, especially as the program has expanded to 920+ vendors. Impacts could vary based on Microsoft’s pullback from, or investment into its Cashback Program.

Notablecalls: So, visitor trends are up and satisfaction is up. Skype overhang was removed 2 weeks ago. The stock is up ~ 10% since the announcement. I know some smart operators that bought EBAY on the day of the announcement and I suspect they will be using the upswing to sell at least some of their holdings.

I think eBay may have 1-2 pts of upside in it over the next couple of weeks (if the market holds).

Don't know what to do with the stock this morning. Maybe the open will offer a nice entry oppy.

Monday, September 14, 2009

Soleil's Princeton Tech Research is out downgrading First Solar (NASDAQ:FSLR) to Sell from Hold while lowering their target to $96 (prev. $170).

Even the best thin film manufacturer in the world is not immune to the effects of overcapacity and the downward spiral that is occurring in solar module pricing. While the firm believes FSLR will remain the low cost producer of a solar module over the next several years, the company is facing a much more difficult margin environment going forward and it is now done with the high-growth portion of its capacity ramp. With module pricing likely to remain under intense pressure through 2010, and little new capacity likely to come on-line through the end of 2010, they believe the risks to First Solar's earnings are to the downside over the next four to six quarters. They are reducing their price target to $96 - 17X Soleil's $5.65 per share estimate for 2010.

One Era Has Ended At First Solar; A Newer, More Difficult One is Beginning - The last three years has been characterized by: 1) Large subsidy programs (relative to the industry's production capability); 2) Steady to HIGHER module prices; and 3) Massive increases in FSLR manufacturing capacity (from three 25 MW lines to twenty-three 55 MW lines in a little over three years). Earnings increased explosively in this "best of all world's" environment. Over the next three years, we are going to see almost the polar opposite: 1) Small subsidy programs (relative to the industry's production capability); 2) declining pricing and margins; and 3) Relatively modest growth in FSLR's manufacturing output. With unit margins on each module declining and little capacity growth, Soleil believes the risk to First Solar's earnings are to the downside - the era of continual upside earnings surprises is likely over.

Soleil believes each of those factors is going to be radically different going forward. The next 12to 18 months is going to be characterized by:

Subsidy Programs Becoming Small Relative To Industry Capacity – In a world where the solar industry was capable of producing roughly 2 GW per year of modules (2006/early 2007), the subsidy programs that drove the industry (Spain and Germany) absorbed all the modules that were produced. The first signs of danger for the industry became apparent in Q3 2008 (and had nothing to do with the global financial crisis) when Spain instituted a hard cap of 500 MW on its market for 2009. This was the first sign that subsidy programs for solar were not going to be infinite in scope. (It was a given that, at some point, we were going to discover that demand was not infinite...the only question was when). With the industry's manufacturing output scaling rapidly (toward 20 GW or more in late 2010), many producers in the industry have already confronted an environment in which they are not able to sell all they are capable of producing. It is worth nothing that in just the last three to four weeks, there have announcements relating to over 3 GW of thin-film module capacity that will be on-line/producing over the next 18 months - Nanosolar (private), Solyndra (private), Sharp (6753.T - Tokyo - Not Rated) and Showa Shell (5002.T - Tokyo - Not Rated) have all made announcements about large amounts of capacity that will be up and running over the next 12 months (cumulatively over 3 GW). Capacity continues to expand throughout the solar industry. With significant oversupply of modules now facing the solar industry for the first time, and many producers struggling to sell all the modules they are able to produce, the firm believe sthe odds are above 50% that over the course of 2010 First Solar will not be able to sell 100% of its manufacturing capability. The volume assumptions in First Solar earnings models are at risk to the downside, we believe, for the first time since the company came public in late 2006.

Rapidly Declining ASPs – The pricing environment in the solar industry has changed radically over the last year. The industry has moved from ultra-high pricing (driven, primarily, by an overly attractive subsidy program in Spain) to an environment of significant overcapacity that is forcing pricing and margins down at every step of the solar value chain. Crystalline module prices in the third quarter of 2009 are, Soleil estimates, going to be more than 50% below where they were in the prior year. Wafer, cell and module prices are now declining 20% or more per quarter, as the industry wrestles with a relentless expansion of capacity in the face of stagnant demand. First Solar's management acknowledged the reality of this changed environment on the company's second quarter earnings conference call by announcing that it would institute a rebate program on its module sales.

Crystalline-Module Pricing At No Premium - Thin-film modules must sell at a discount of roughly $0.07 to $0.10 per watt per efficiency point to compensate for higher balance of system costs. Assuming 14% to 15% module efficiency for the average crystalline module producer, crystalline module prices are now selling essentially at parity to First Solar's modules (just under 11% efficiency). As polysilicon costs continue to decline, and take crystalline module prices down with them, First Solar is going to have to reduce their module prices in response (as witnessed by the institution of a rebate program early in the third quarter.

Little Growth In Manufacturing Capacity at First Solar – First Solar's physical output of modules is not going to increase dramatically going forward – the company has stopped adding new manufacturing sites (it could gear up again at some point in the future, but we have now gone from one site with 7 lines to three sites with 23 lines – a more than seven-fold increase.) After a seven-fold increase in the number of production lines in just over two years, we are now entering a period where the number of lines the company is operating is basically not going to increase. The ending of ultra-rapid growth in unit output is a very significant turning point for First Solar.

Reducing 2009 and 2010 EstimatesSoleil is reducing their estimates earnings estimates for First Solar for both 2009 and for 2010 due to the increased downward pressure they see on pricing throughout the solar industry in general and at First Solar specifically. For 2009 they are reducing their estimate from $8.10 per share to $6.80 per share. For 2010 they are reducing their estimate from $8.25 per share to $5.65 per share

Risk to Consensus Estimates Is Now 90% To The Downside.First Solar has surprised to the upside every quarter since it came public - usually by a significant amount. We just do not see that happening in the coming quarters. Looking forward into 2010, however, the company does not have the additional capacity coming on line to drive the monster "beats" to consensus expectations that have been its hallmark over the last three years. It is worth noting - in a declining ASP environment and with no significant capacity additions in the offing - that the current quarterly revenue and EPS estimates for the back half of 2010 (Q2 $585mm/$1.71 per share; Q3 $640mm/$1.88 per share; Q4 $686mm/$2.06 per share) imply the addition of roughly 50 MW of capacity each quarter (200 MW of annual capacity - each quarter) at high margins. Soleil believes that is extremely unlikely in the current environment and believe the risk to First Solar's consensus estimates are almost all to the downside.

Notablecalls: First of all, I'm sorry if I put out too many details. But this call from Priceton Tech Research's Paul Leming is just so good. Excellent job! If you actively invest/trade in the space I suggest you contact these guys.

Contact : PTLeming (a/t) PrincetonTechResearch.com

I think this call has the potential to hurt FSLR today to the tune of 5 pts (or more). The stock has bounced 15-20 pts from its current lows and it kind of looks like downside is coming.

The Street low target is currently $86 from Kaufman but they have messed up their timing badly so I would consider Leming's $96 the true Street low at the moment.

Citigroup is downgrading Potash (NYSE:POT) and Mosaic (NYSE:MOS) to Hold from Buy with POT's target lowered to $98 (prev. $115) and MOS seeing its target lowered to $54 (prev. $62).

Citigroup notes they recently conducted a proprietary farmer survey, talked to several US fertilizer distributors, and attended the Farm Progress Show in Illinois. Based on their discussions it seems that the fall fertilizer application season is likely to be weaker than expected. Firm's earlier thesis that farmers could not skip application indefinitely after taking a “fertilizer holiday” in 2008-09 still stands, but application may be delayed past fall, creating pricing risk in the near-term. This risk is magnified by the Chinese contract delays, debt-laden producers, and weaker farmer economics. As a result, they are moving to the sidelines on fertilizer stocks, although they don't see much downside in shares from current levels.

1. Fall Potash Applications Likely Weaker Than Expected – Growers in the cornbelt could be harvesting the crop 2-4 weeks later than usual, limiting the fall fertilizer application window. Dealer inventories are lean, but distributors the firm talked to weren’t worried about securing product given high producer inventories.

2. Chinese Contract Delays Create Price Risk – It was expected that the Chinese would come to the table after India settled at $460/mt. However the contract has been delayed and the Chinese could dangle the “volume carrot” to extract lower prices, a tactic India used in their contract.

Debt-laden Producers Threaten Oligopoly Pricing – A key tenet of our potash thesis was a strong oligopoly due to limited number of resource owners. However, Russian producer Silvinit showed its willingness to cut price to gain volumes in India, while K+S has added debt based on its acquisition of Morton Salt. In the India contract, Silvinit was able to boost its share of the Indian government contract over 2x (from 400kt in 2008 to 850kt in 2009) by cutting price.

3. Falling Incomes are Keeping Farmers on the Sidelines – Farmer incomes have fallen 38% Y/Y; many cornbelt farmers are losing money with current spot corn at ~$3.15, which makes them hesitant to spend money.

Notablecalls: Not a strong call. To be honest it reads like a 6th grade homework assignment.

Nonetheless I think it will work a bit here. After all, Citi has a pretty decent track record when it comes to Fertilizers.

The whole sector has been trading like sh*t lately, opening strong and fading hard. I suspect that given the market dynamics this one has potential to surprise...to the downside. One to watch!

Friday, September 11, 2009

Barclays is out with a major call on American Axle (NYSE:AXL) upgrading the shares to Overweight from Equal-Weight while raising their price target to $13 (prev. $8).

According to the firm the upgrade comes as the recent GM agreement and in their view, a strong likelihood of a bank deal should remove liquidity concerns, enabling investors to focus on AXL's earnings in a recovery, which they view very favorably. Firm is bullish about the prod. outlook for AXL's top platform, the GMT900, and believes the Street materially underestimates demand for full-size trucks in the context of a recovery in SAAR, likely marketing programs focused on large pickups, and a 1Q10 bottoming in construction employment. Benefitting from its large exposure to this segment and its large cost reductions, AXL could expand its EBITDA margin to the 13%+ range in 2010 and nearly 14% by 2011, yielding above-consensus earnings growth.

Barclay's expects AXL to beat the Street as early as this qtr, benefitting from a sharp rebound in pickups post clunkers and shutdowns. This could be a catalyst for the stock to rerate towards a valuation more in line with its peers, which trade at 5-6x 2011 EBITDA. Their new $13 PT is based on a still conservative 4.5x their 2011 EBITDA of $365mm.

Barclays is Bullish About the Outlook for GMT900 ProductionLarge pickup production is likely to be up materially in the second half of the year, in our view, benefitting from lean inventories and a potential pick up in sales pace. In August, the GMT 900 sales rate reached 810k units, or about 630k units when conservatively adjusted for cash for clunkers boost. While cash for clunkers mainly drove passenger car sales, the DOT reported 46,836 “Category 2” trucks (which includes pickups and large SUVs) were subsidized. Assuming that 85% were sold in August, and that GM had a 40% share, the potential GMT 900 cash for clunkers boost could be about 16k units, or 180k units on an annual run rate.

Several of the largest automakers have signaled in the past couple of weeks that they are seeing signs of improved demand for pickup trucks over the rest of the year.

As for GM, CSM recently raised its total GMT900 (pickup + SUV) production schedule for the rest of 2009 by about 50k units, with the increase taken more than entirely in 3Q, which was boosted from 119k to 174k units, taking its full year 2009 production to 643k units, in line with Barclays' virtually unchanged estimates.

They believe this sharp sequential rebound in pickup production, post clunkers and summer shutdowns, is not currently baked in the Street’s 3Q09 estimates for AXL, which could lead to a material earnings beat this quarter, although they expect continued restructuring costs (most of which will be subsidized by the new GM deal). Looking ahead, however, the firm is significantly more bullish than CSM on the mid- to long-term outlook for GMT900 production. Indeed, their expectation is that GMT900 sales should continue to represent around 6% of the U.S. SAAR going forward, calculated as GM keeping a 40% average share of the full-size pickup segment (which itself represents 11% of the SAAR), and a 65% of the large/luxury SUV segment (which itself represents 2.5% of the SAAR).

Focus Returns to Long-Term Earnings PowerBarclays believe that with its liquidity issues largely behind it, investors will now refocus on AXL’s longer term earnings power. Firm's bullish view on GMT900 production explains largely their well-above-the-Street AXL earnings estimates, and they believe that, as AXL delivers strong earnings, the stock could start rerating towards a trading multiple closer to that of its peers.

Firm expects AXL to beat Street expectations as early as this quarter, benefiting from a sharp sequential rebound in pickup production post clunkers and summer shutdowns. Based on a much stronger 3Q09 GMT900 schedule than previously expected, they now model AXL to generate $49 mil in EBITDA in 3Q09, representing a per share loss of $(0.10). This would represent a meaningful improvement versus the $(1.75) loss generated in 2Q09, and would be well above consensus loss of $(0.43).

More importantly, however, Barclays' earnings estimates for the next few years are well above consensus as well, reflecting the stronger GMT900 production we expect, as well as the material benefits they expect from AXL’s cost actions. They believe that AXL could generate $296mil in EBITDA in 2010, $365 mil in 2011, and 381 mil in 2012, up from just $91 mil expected this year. On an EPS basis, this represents $1.00 in 2010, $1.65 in 2011, and $1.80 in 2012, well above consensus of $0.73 and $1.30 in 2010 and 2011 respectively.

Notablecalls: I'm going to call this one Actionable Call:

- AXL has become quite a little performer. The stock is mover!

- Barclays' new $13 target is the new Street high.

- Barclays now expects AXL to beat the Street numbers on better than expected GMT900 platform sales. Who would have guessed? Really!

- Short interest is STILL sky-high at almost 32%. They need to start thinking about covering. It's death zone now.

- You're going to be in good company as SAC Capital Advisors recently filed a 13-D on AXL.

The stars have aligned, I think. This one is Actionable.

I expect the shares to trade way above the $7 level with $7.70-8.00 not out of the question. We may have another 15-25% upside mover on our hands today.

Thursday, September 10, 2009

Airlines and particularly Ual Corp (NASDAQ:UAUA) are getting are getting some commentary this morning:

- Barclays is out saying they think many underestimate the potential for a significant airline revenue recovery, particularly for the legacy carriers. With recovery expectations muted, they think even a relatively modest recovery would pave the way for a profitable 2010 and materially higher share prices. They continue to favor legacy airlines over low-fare carriers, with top picks DAL and UAUA, the former getting no respect lately. Among the low-fare airlines, the firm also favors ALGT and JBLU.

Firm believes current thinking on the industry revenue environment and potential for recovery is very small relative to the potential. They understand that companies need to plan for a revenue environment that remains very soft. They also understand that revenue has been headed in a single direction (down) the entire year. While it’s easy to extrapolate these negative trends for a considerable period of time, the firm urges investors to consider two things

1) the market and the companies had little visibility into the speed or magnitude of declines in revenue earlier in the year (Figure 1), and

2) the history has several examples of rapid recovery off depressed bases (Figure 2).

July industry results combined with recent August revenue disclosures point to some evidence that a recovery in airline revenue has begun. They think near-term revenue data is likely to surprise many to the upside. Combined with increasingly easier comparisons, they expect those in the more bearish revenue camp will be forced to begin modeling some revenue recovery

Barclay's current forecast for UAUA calls for 200% raise in share price. Their price target stands at $19 per share.

- JP Morgan is out noting that for the first time in a long time, close-in estimates look about right, while 2010consensus could stand to improve, in their view. More importantly, assuming stable demand and fuel, they now expect winter to pass with nary a bankruptcy in sight, necessitating equity ratings upgrades for LCC and UAUA, downgrades for AAI and JBLU, as well as an overall improvement in both our sentiment and conviction. JP Morgan is upgrading their sector view from Neutral to Overweight.

Are they too late? True, the XAL has led other consumer indices since July, most indices since March, it but has seriously lagged year to date. Ignoring risk and the fragility of certain balance sheets, valuation for ALK is still highly compelling, followed by DAL and UAUA, then AMR and CAL, with LCC bringing up the rear. AAI looks more attractive than JBLU, though not wildly so. LUV is still expensive, in firm's view.

If it sounds like they’re more bullish, it's because they areWinter is forthcoming. It will be cold. It will be long. But it is not expected to witness the level of upheaval that the firm feared just a few months ago. They simply cannot ignore recent economic data and growing evidence of global economic improvement. As such, they believe the industry is on the verge of turning a financial corner and would suggest that risk-tolerant investors begin adding more aggressively to their existing airline equity holdings. Chief among the near-term, potential catalysts to the upside are seemingly achievable 2H consensus forecasts, a potential shift from negative to positive management guidance, a JPM GDP forecast suggesting 2010 consensus has room to strengthen, and a continued improvement in sentiment as forecasted winter bankruptcy risk wanes.

Close-in estimates look about right; some airlines might actually guide up. For the first time in roughly a year, we don't differ materially from near-term consensus. Better yet, demand may have slightly exceeded initial management forecasts, while weather and fuel appear to have cooperated. Delta is among the more likely to slightly boost existing margin guidance, as well as potentially JetBlue. JP Morgan is not looking for huge improvements, though the passing of seemingly perpetual downward guidance may be greetedenthusiastically by the market.

New ratings. As a potentially challenging winter approaches, United may occupy the capital-raising spotlight more than others, particularly LCC, in JP Morgan's view. As a result, their UAL Corp (NASDAQ:UAUA) equity rating moves from Underweight to Overweight on the expectation that sentiment improves with each liquidity salvo they fire, whereas LCC moves just a single notch up to Neutral given still-limited liquidity options should fundamentals fail to improve. Countering these changes are downgrades of AAI and JBLU from Overweight to Neutral, despite still attractive risk-reward and healthy potential upside to price targets. These are relative ratings, after all, though the lower perceived risks of AAI and JBLU argue strongly for their continued inclusion in a basket of equities, in their view, or for those lacking the stomach for material risk and volatility.

Lastly, valuations look reasonable (or downright cheap, if one believes in V-shaped demand recovery), particularly EV/EBITDAR for ALK (2010 EBITDAR on 2009 cap structure), followed then by DAL/UAUA, then AMR/CAL, with LCC and the Discounters bringing up the rear. Accordingly, the firm believe now is the time for investors to begin adding aggressively to their existing airline equity baskets.

New price targets are below:

Notablecalls: UAUA is going to fly again. I'm guessing at least 12-15% upside move today with 15-25% upside not out of the question. So, $7.50 -$8.00 is the range we are talking about here. There's a 22% short interest in the name.

Both JPM and Barclays are now outright saying they expect upside surprises in Airline earnings. When was the last time we saw that? I surely can't remember.

These two calls will put fire under the Airlines today. UAUA, AMR, LCC are the ones to keep on the radar.

JP Morgan is upgrading United Parcel (NYSE:UPS) to Overweight from Neutral this morning. They are raising their price target to $70 (prev. $57)

Firm notes they believe that UPS is viewed as a defensive transport name with less operating leverage and that this perception has been a major driver of the underperformance in UPS stock versus most other transports in 2009TD. In their view, UPS stock has lagged too much, and the stock does not reflect the boost a turn in the U.S. economy would provide to UPS earnings performance and to the stock. They are upgrading UPS from Neutral to Overweight.

Raising rating to Overweight as reward / risk is attractive. Relative to most other transports and many industrial stocks, JP Morgan believes that UPS reflects less anticipation of a turn in the economy, and they believe potential downside risk for UPS stock is modest, while upside potential is significant. They are upgrading UPS to Overweight from Neutral because they believe there is room for UPS stock to reflect a stronger expectation of a cycle turn in order to be consistent with the anticipation reflected in other industrial and transport stocks. They also believe UPS’s operating leverage in a turn may surprise on the upside.

Catch-up opportunity is meaningful—UPS has lagged 80% of S&P 500 Industrials. Based on 2009TD performance and also the % move of stocks off their 12 month lows, firm's analysis shows that UPS stock has underperformed about 80% of the industrial stocks in the S&P 500. While underperformance versus higher beta names makes sense to some extent, they believe that UPS’s earnings will respond earlier in the cycle relative to many industrials, and the underperformance appears overdone.

Operating leverage in 2010 could surprise to the upside. The two-year ~600 bp decline in UPS’s total operating margin in 2009 vs. 2007 reflects a much sharper decline in margin performance than we have seen in the past due to both lower revenue and also the effect of unfavorable labor mix (union seniority). While UPS is not typically viewed as a name with operating leverage, JP Morgan believes that gradual reversal of unfavorable factors that drove margin pressure could provide greater than expected margin upside in 2010.

Incrementally positive transport data points are good for UPS. While there is not yet a strong turn in transport demand, rail weekly volumes, IATA monthly freight data, and truckload company comments point to incremental improvement in demand. JP Morgan believes that gradual improvement in parcel /express volumes is also likely.

They are introducing their 2011 EPS estimate of $3.50/share and Dec 2010 price target of $70. JP Morgan's new price target is based on applying a 20x P/E multiple to 2011 estimate of $3.50/share.

Notablecalls: I like this call as JP Morgan has done a good job covering the space. They upgraded Fedex (NYSE:FDX) in late June around $50 and the stock is now trading around $70. FDX is generally considered a better name so upgrading it ahead of UPS made sense (& it clearly worked).

So now it's time to upgrade UPS, the lesser peer. I suspect this too will work. The upside to JPM's $70 target price is solid and will attract buyers.

All in all, I think UPS can trade up towards the $56 level in the very n-t. Ketchup!

PS: Note how UPS's rolling fwd P/E has almost always lagged FDX's. Only over the past months the ratio has dipped below 1x level.